A partial termination of a retirement plan is one of those things that you know  now what you didn’t know then. If it happens, then all plan participants must be fully vested. But there is no clear objective test as to when it happens. What got me thinking about this subject was yesterday’s article by Jon McLaughlin, Extinguishing Pension Plans By Partial Termination & Aggregation, that appeared in the The Business Law Society, a publication of students of the University of Illinois College of Law. Mr. McLaughlin writes:

This article explores the question of when successive reductions in plan participants should be aggregated for purposes of determining whether a partial termination occurred. The best guidance that the case law can currently render is that multiple reductions in force are aggregated, for purposes of determining whether a partial termination occurred, when they are related, meaning that they have spawned from the same “major corporate event”.

And non-lawyer that I am, I put the issue in the context of retirement plan administration. That is, if the partial termination occurs as a result of aggregation as written about by Mr. McLaughlin (rather than by a single event), then prior non-vested amounts of terminated employees may have been forfeited and reallocated to current employees or used to pay plan expenses. The result of which will require the plan sponsor to contribute money to restore the forfeitures which could be a sizeable amount.

So what’s a plan sponsor to do? Two things come to mind:

  • Consider the partial termination rule in the context of planning for a sale of part of the company, downsizing that will affect participation in the plan – and plan accordingly.
  • Determine whether it would make sense to submit the plan to the IRS for a ruling as to whether a partial termination occurred.

Now doesn’t this clarify the matter?